Benefits and risks of price caps

Transcription

1 Benefits and risks of price caps Cédric Philibert Energy Efficiency and Environment Division OECD/IEA, 2006

2 What would price caps be? Supplementary permits made available in unlimited quantities at a given price At domestic and/or international levels If at the international level, one institution must be tasked with selling permits to governments, and goverments to entities If at the domestic level only, international coordination requires all-sectors emission coverage through an upstream regime or ETS and taxes at the level of the price cap

3 The benefits Benefits and costs are uncertain, and climate change is cumulative Short term certainty on emission levels may prove costly and is not worth it Price caps reduce expected costs i.e. all possible cost outcomes times their probabilities of occurrence may help engage more countries and set relatively tighter targets More ambitious targets with price caps offer higher expected benefits & lower expected costs

4 The risks (1) Weak against climate catastrophes? If a GHG threshold is known and close: Use a quantity target to stop emissions If a GHG threshold is a possibility but its level is unknown: Favour the most ambitious policy Does not ensure GHG stabilisation? Level and agenda left undecided Ensure action, not exact results Favour the most ambitious policy Over time, adjust the target & the price cap

5 The risks (2): too low price caps? Price caps should be set in the upper range of cost expectations for a given target until targets are ratcheted down Governments may not use them right would they do better without price cap? Agreeing on level may be easier than it seems: Differentiation amongst countries would remain through differentiated assigned amounts and levels of efforts ENGOs say abatement costs are low; industry say they are high. Some price cap level might be felt high enough by the ENGOs and low enough by the industry An international agreement on price cap level would be preferable but not absolutely necessary Several price cap levels may coexist in one international trading system; to avoid the domination of the lowest price cap level, only complying countries (i.e. not using the price cap) should be net sellers

6 Where should the money go? If the international permit price reaches the price cap level, money will be raised Little hope for full restoration of the target if the international architecture of commitments is comprehensive and global (incl. CDM, JI, domestic offsets), there would be no cheap reduction left Best options may be the following: Greater adaptation funding to compensate for greater emission levels Greater R&D funding to reduce abatement costs in subsequent periods But the value of the price cap does not lie in its possible capacity to raise some money If everything goes right, markets work and technology develops, the permit price will remain below the price cap and the (more ambitious) targets will just be met

7 The risks (3): A threat for technology development? Reducing expected abatement costs means reducing expected benefits for climatefriendly technology developers if the ambition in the targets is unchanged Targets and price cap level drive technology development, not certainty on quantitative results Price volatility (e.g. oil) shown to deter investments In any case, more specific instruments remain needed to promote high-cost technologies with great learning-bydoing potential (i.e. PV) The price cap should smoothly grow over time And in a decade or two reach a level above the cost of CO2 capture and storage ( backstop technology)

8 The risks (4) Price caps have proven unworkable in different contexts Let the market do and it will deliver cheap reductions What makes such contexts different? For commodity markets, the scarcity is real; capping prices may lead to shortages For emissions trading, the scarcity is created by the regulation; no shortages at stake If the markets do deliver enough cheap reductions, nobody will use the price cap

9 Conclusion Price caps address all sources of uncertainties on abatement costs Uncertain economic growth Technology development, energy prices On balance, benefits outweigh risks If price caps set in the upper range of cost expectations And if targets are made more ambitious than they would be without a price cap